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Much of the growth that has taken place in the top tier of CROs in recent years has been in the acquisition of some of the smaller, more innovative companies, rather than an increase in the number of compounds under study.
The importance of midsized CROs in pharmaceutical and medical device development.
It’s no surprise to industry insiders that the largest pharmaceutical companies rely on the largest contract research organizations (CROs) for the lion’s share of their outsourced R&D. For example, in the first quarter of this year, 34% of ICON’s total revenue (approximately $134 million of its estimated more than $500 million in annual sales) was with one client, presumably Pfizer;1 industry-leading Quintiles has 14 clients that each generate more than $100 million in revenue annually;2 and, in the first half of 2014, PRA derived 66 percent of its revenue from large pharma/biotech companies.3 ICON, Parexel and PPD all have partnerships with Pfizer; Covance (LabCorp) has partnered with Eli Lilly, Bayer and Sanofi; and Quintiles has partnered with Takeda and Roche, to name a few.
The leading model for these relationships has increasingly become based on strategic partnerships offered by CROs. Strategic partnerships have largely supplanted project-by-project and preferred provider outsourcing methods, and for good reason. To remain profitable, sponsors are seeking greater productivity from their R&D investments, and this is often facilitated by highly integrated relationships spanning many years and multiple projects. The shared objectives, therapeutic knowledge, technologies and processes, as well as early and mutual involvement in protocol design and operational structure, yield measurable efficiencies and gains in productivity. According to the 2014 Parexel Strategic Partnership report, the strategic partnership model is now the dominant outsourcing approach for sponsors with R&D spending of more than $500 million.
But, what does all this mean for pre-revenue, small and midsized pharma/biotech and medical device sponsors?
Stepping Down a Tier
Many assume that a CRO doesn’t truly reach world-class status until it has perhaps 10,000 employees and a revenue base in the hundreds of millions of dollars. Yet according to Parexel’s 2015 Investor Day report, 80 percent of R&D originates from outside the top 25 largest pharmaceutical companies. Evaluate Pharma estimated 2013 CRO revenue attributed to the pharma industry was $26 billion, and expected to grow to $37 billion by 2018. If those numbers and Parexel’s estimate are correct, midsized and smaller CROs will divide outsourced R&D worth $29.5 billion by 2018. That’s a market that can’t be ignored.
Despite the volume of business being done at the top end of the market, midsized CROs are thriving in the current marketplace for a variety of reasons that center primarily on focus, flexibility and innovation.
In almost any market, being the largest player doesn’t guarantee success. According to Steve Jobs, IBM was outspending Apple 100 to one in R&D when the Macintosh was introduced. “It's not about money,” he said. “It's about the people you have, how you're led, and how much you get it.”
In pharma, large providers may have the global footprint required to conduct some large studies, but they rarely offer the same kind of flexibility, personal service and senior management involvement offered by smaller research companies. Additionally, smaller pharma, biotech and medical device sponsors say they often have trouble gaining needed expertise, personnel and resources when partnering with the top-tier CROs. Moreover, innovation is an elusive quality under the best of circumstances and is hard to come by in large organizations with venerable and established work processes.
Focus and Flexibility
Regardless of the industry under discussion, the largest clients almost always require the biggest expenditure of management time and internal resources. When CROs are relieved of that pressure, they have a greater capacity to focus study teams and management time on numerous and varied projects.
Much of the growth that has taken place in the top tier of CROs in recent years has been in the acquisition of some of the smaller, more innovative companies, rather than an increase in the number of compounds under study. Quintiles acquired Novella Clinical in 2013 to bolster its expertise in oncology and medical devices, but also to offer some of Quintiles’ smaller clients and projects the benefits of a midsized CRO. Novella Clinical retains its own name and brand identity and operates as a division within the larger organization.
It’s a mistake to assume that the largest CROs necessarily have the most talented scientists. Many midtier and smaller CROs were founded by individuals or groups of scientists whose expertise in a therapeutic area or other discipline is at the forefront of their competitive advantage. As businesses become larger, processes become more fixed and rigid. By stepping down a tier to a midsized CRO, clients enjoy the benefits of global scale with more flexible and often more innovative processes. Clients of midsized CROs say much of the appeal of working with a midsized partner is an enhanced ability to make quick decisions and adapt to study changes on the fly.
By their nature, the largest CROs try to cover all the bases, claiming expertise in the full gamut of clinical trial operations from preclinical to post-approval as well as therapeutic and regulatory expertise in a wide range of areas. Unburdened of this necessity, midsized CROs are able to provide a global footprint needed for large studies as well as deep expertise in specific therapeutic areas or technologies.
For example, medical device R&D spending is roughly 17% of global pharma spending and was approximately $23 billion in 2013. Until recently, building global clinical trial capabilities for medical devices was not a priority for the large CROs due to the generally smaller market size and a preoccupation with servicing their existing large pharma client base.
In this vacuum, several midsized CROs seized the opportunity to develop significant medical device capabilities, including Theorem Clinical Research (recently acquired by Chiltern), Medpace and Quintiles’ Novella Clinical, and all have seen their focus on this sector pay off. Being able to offer both strong drug and medical device capabilities puts these organizations at the forefront of running complex drug/device combination trials - a market expected to grow rapidly as wearable and mobile technology evolves.
Midsized CROs are often overlooked when clinical trial costs exceed $25 million. However, a number of CROs have grown to midsized with a global footprint, international site network and a large trial management infrastructure built around a single therapeutic area such as oncology, dermatology or kidney disease. Because, ultimately, sponsors are investing in a project team to research a specific issue, there is no reason that a midsized CRO can’t partner with a large sponsor to execute key trials where the midsized CRO has therapeutic expertise.
A Level Playing Field
Technology advances that once may have given the larger players an advantage have been democratized. Medidata, Oracle, Spotfire, Merge and other software platforms are easily scalable, making it possible for CROs of all sizes to take advantage of the same technology. Today, midsized CROs can offer world-class technology and programming along with flexible processes geared towards satisfying the needs of small to midsized sponsors.
Many great research organizations of all sizes exist in the marketplace. Just because a CRO doesn’t have revenue greater than $1 billion or staff in 60 countries doesn’t mean it can’t be a valuable partner to a wide variety of sponsors. Giants like Quintiles and PPD were once midsized CROs that grew by providing strong services to their client bases. Today, midsized CROs like Chiltern and Medpace are continuing that tradition.
The right fit for each sponsor and project is dependent on a wide range of factors, but sponsors should be aware that bigness in and of itself is the wrong reason to choose a CRO. Just because large CROs may have the status of size doesn’t necessarily improve the quality of the research or the value of a partnership. In fact, sponsors find they often have a smoother process and better outcomes by stepping down a tier to a midsized or smaller CRO.
Jason Monteleone is the former CFO of Theorem Clinical Research and current strategic financial consultant.
1: Icon’s Q1 2015 Results Presentation, available here: http://investor.iconplc.com/results.cfm.
2: Quintiles presentation at the William Blair 35th Annual Growth Stock Conference, June 9, 2015, available here: http://investors.quintiles.com/files/doc_presentations/2015/William-Blair-35th-Annual-Growth-Stock-Conference.pdf.
3: PRA’s S-1 Filing, available here: http://www.sec.gov/Archives/edgar/data/1613859/000104746914007456/a2221344zs-1.htm.